Capitalism And Freedom

Friedman says people often justify the expansion of government power by arguing that additional state expenditures are necessary to curb unemployment. He notes that New Deal policies popularized this argument and established a pattern of unwarranted government spending. During the New Deal, government spending was thought to “prime the pump”: a short period of extra spending would boost the economy, and then the government could step back (75). This makes sense in theory but was not true in practice, Friedman says.

More recently, arguments for extra government spending have focused on a balance-wheel theory: when private expenditures decrease, government spending should increase and vice versa. “Unfortunately, the balance wheel is unbalanced,” Friedman remarks, noting that each recession “sends a shudder through politically sensitive legislators and administrators with their ever present fear that perhaps it is the harbinger of another 1929-33” (76). Therefore, the government pours money into new programs when a recession looms but fails to repeal them when conditions improve. Friedman thinks fears about short-term economic stability should not drive government spending. Instead, expenditures should be funded by taxes and driven by what a community believes the government will achieve more efficiently than private efforts.

Friedman also thinks the balance-wheel theory is based on shaky reasoning.